Publication: Monitor Volume: 6 Issue: 71

President-elect Vladimir Putin has indicated that he sees reform of fiscal relations as a means of strengthening the center’s control over Russia’s wayward regions. This will be a difficult exercise with an uncertain outcome. Some of the pitfalls are outlined in the latest survey published by the Organization for Economic Cooperation and Development (OECD), which offers a detailed analysis of budgetary relations between the center and the regions (Economic Survey of the Russian Federation, OECD, Paris, March 2000).

So far (1992-2000), government at all levels–federal, regional and local–has been chronically prone to make spending commitments which have exceeded revenue-raising capacity. At the same time, most tax bases and rates remain centrally determined; tax collection is by federally controlled tax services, tax police and customs; and a federal treasury system, through which the moneys flow, operates in all regions except Tatarstan.

Until 1994, division of the revenues between federal and regional budgets was highly politicized: a matter of discretionary deal-making by the center through a series of bilateral negotiations with individual regions. Since 1994, a slightly more rule-governed system has been in place. In principle, all regions now remit to the center uniform shares of revenue from the main taxes and duties. The center then transfers some funds back to the regions, chiefly to prop up regions which would otherwise run particularly large budget deficits.

The OECD identifies several problems in this arrangement. While there is a general lack of transparency in Russia’s budgetary process as a whole, it is especially true at regional and local levels, where it is often unclear which budgetary level is responsible for which area of expenditure. Most social-welfare spending has been delegated by the center to subnational levels of government without adequate funding. Those revenue transfers made from the federal to regional budgets aim only to reduce regional budget deficits, not to cover objectively assessed local needs. Regions therefore have little incentive either to collect tax vigorously or to rationalize and account properly for their spending.

Regional and local administrations have coped with these problems by widespread use of barter, money surrogates and tax offsets, and by hiding resources in off-budget funds. Such stratagems have enabled regional leaders to hold back funds from the center and to avoid interest costs. They have also facilitated the surreptitious bailing out of failing enterprises at the expense of regional electricity companies. These concealed subsidies have hindered the restructuring of the Russian economy. Barter and money-surrogate transactions also provide scope for corrupt, crony dealings from which regional and local officials benefit to a large degree.

The OECD view is that the federal authorities should take back responsibility for much of the social-welfare spending that they have delegated to the regions without supporting revenue. By the same token, the federal government should take a larger share of revenue, while spending responsibilities should be clarified and subnational authorities given a clear tax base of their own. Present Russian plans for fiscal reform are considerably less radical than this. The present budgetary arrangements between the center and the regions are not at all transparent. As outlined above, this has adverse consequences for the restructuring of the economy as a whole. It also (a) enables regional and local officials to make money on the side, (b) helps factory bosses to avoid the pain of restructuring and (c) enables the federal government to divide and rule by playing individual regions off each other.

This last point could turn out to be of crucial political importance. The OECD argues that a more transparent fiscal system would be good for the Russian economy in the long run. Yet it could also remove each regional governor’s uncertainty about other regions’ bargaining positions and thereby make it easier for groups of regions to gang together in negotiating with the center. In such circumstances, the center could lose its cherished ability to divide and rule. If that proved to be the price the federal government had to pay for greater transparency, Putin might be deterred from biting the bullet of radically reforming fiscal federal relations.